Commentary - It Is Not 1929

It's tough to pick up a paper, listen to the radio, or turn on the financial television news without someone comparing our current stock market correction to the stock market crash of 1929. For any of you that fell asleep in history class, the US stock market fell 89% from 1929 to 1932 and it remains the greatest stock market crash in the history of our country.

For perspective, I thought it might be useful to share two things that I see as very different today than they were in 1929.

Government Action
One is government recognition of the crisis. While some may criticize our government for doing too little too late, I will let history be the final judge of that. All I want you to do is simply read these two quotes. They will tell you that our government’s response in 2008 is nothing like its response in 1929.

Back in 1929, then Treasury Secretary Mellon said, "I see nothing in the present situation that is either menacing or warrants pessimism." Now fast forward to 2008 and Chairman Bernanke said, "We will continue to use all tools at our disposal to deal with this crisis."

As I said 2008 is not 1929.

Sovereign Wealth Funds
Here is something else that is very different. Back in 1929, there were no such things as Sovereign Wealth Funds. Sovereign Wealth Funds are government-owned investment funds that are typically funded by surplus revenue, mainly oil; however, others have been funded with excess reserves that have developed over time due to a favorable trade balance. In fact, the very first Sovereign Wealth Fund wasn't created until 1953 (the year I was born) when the Kuwait Investment Authority was established. Today, there are more than 45 Sovereign Wealth Funds with a current value of over $4 trillion (according to the World Bank). The largest Sovereign Wealth Fund is the Abu Dhabi Investment Authority in the United Arab Emirates, followed by China, Singapore, Norway, Saudi Arabia, Kuwait and Hong Kong.

These Sovereign Wealth Funds provide a backdrop of liquidity today that was not present in 1929. Again, 2008 is not 1929.

What About 2009?
Now that you realize that 2008 is not 1929, you may ask what is in store for us in 2009? While no one knows for sure, I think I have a pretty good idea what could potentially be in store for our economy and our markets.

And from my perspective, all you have to do is look at the stimulative policy response and look where inflation is heading. I believe that both of these signs bode well for a recovering economy and recovering stock market in 2009. Here’s why.

Policy is Stimulative
Let's start with just how stimulative our policy response has been. Keep in mind, all of this is in addition to the recent 50 basis point interest rate cut from the Federal Reserve Board.

First, we have the bank recapitalization program consisting of an injection of $125 billion in eight financial institutions. Then, there is another $125 billion that will be made available to any bank or bank holding company that allows any bank to issue senior preferred stock to the Treasury with a 5% dividend (and increase to 9% after five years). Banks may continue to pay dividends, but the Treasury's shares would have priority over other preferred and common shares. Banks may not, however, increase dividends or repurchase common shares without Treasury approval.

Second, the Treasury has also signaled that it plans to put the next $100 billion of funds authorized by the T.A.R.P. legislation toward mortgage-related asset purchases. This will leave $350 billion available for other uses. And to the extent that there is demand for equity capital beyond the remaining $125 billion, the Treasury has the authority and capacity to expand the program.

Third, the Federal Deposit Insurance Corporation (FDIC) has announced that it will use its "systemic risk" authority to make available a guarantee on newly issued senior unsecured bank debt through June 30 2012. The guarantee includes promissory notes, interbank lending, and unsecured portions of secured debt. In addition, the FDIC is going to extend deposit guarantee coverage to all deposits; in non-interest bearing accounts through 2009 (the $250,000 limit on interest bearing accounts remains in place). These accounts are often held by businesses to fund payrolls.

Fourth, the Federal Reserve Board announced that its new Commercial Paper Funding Facility (CPFF) will begin operation by the end of October.

Global Policy Response
And that's just here in the United States. Think about how stimulative the policy response has been around the world.

• The United Kingdom pledged 50 billion pounds to recapitalize the banking system; it is guaranteeing up to 250 billion pounds of new bank debt and is guaranteeing retail bank accounts up to 50,000 pounds
• Germany is recapitalizing the banking system with 80 billion euros that could reach 400 billion euros
• France is recapitalizing their banking system with 40 billion euros
• Portugal has guaranteed 20 billion dollars in short-term bank lending
• Spain has guaranteed 100 billion euros in new bank debt
• Ireland has guaranteed all bank deposits in its six largest banks
• Austria has pledged 85 billion euros to provide loans against illiquid collateral
• Australia is guaranteeing all retail bank deposits for the next three years
• New Zealand has guaranteed all retail bank deposits
• The United Arab Emirates has also guaranteed all retail bank deposits

It stands to reason that all of these responses are likely to be stimulative to our economy and our markets in 2009 and beyond.

Inflation Headed Lower
In addition to all of this, inflation is headed lower. I can make this one real simple and very brief. Oil was trading close to $150 a barrel earlier on October 16. Now, it is in the $70's. This Oil "tax cut" may be the biggest tax cut in history and I believe it has yet to work its way into our economy or our markets.

In closing, while no one knows what tomorrow will bring. I believe I have a good idea what 2009 may bring. From my perspective, I believe that lower inflation together with policy that is stimulative means better times ahead for both our economy and our markets. Aren't you glad 2008 is not 1929? I know I am.

Have a great day, keep a positive attitude and please join me in resolving to remain a long-term investor in a short-term world.

All investments involve risk, including the possible loss of principal.

The opinions and forecasts expressed are those of Dr. Robert J. Froehlich and not necessarily those of DWS Investments. All opinions and claims are based upon data at the time of the publication of this article, October 17, 2008, and may not actually come to pass. This information is subject to change at any time, based on economic, market and other conditions and should not be construed as a recommendation.Dr. Robert J. Froehlich is Vice Chairman of DWS Investments and serves as Chief Investments Strategist.  DWS Investments is the US retail brand of Deutsche Bank’s global asset management division.